The Global Telecommunications Industry In USA - Research Paper Example

The Global Telecommunications Industry In USA Table of Contents Introduction 3 Analysis of Telecommunications Industry Using Porter’s Five Forces 5 PEST analysis of telecommunications industry in USA 9 Opportunities and Challenges in Telecommunication Industry 13 Telecommunication Companies of USA 14 Market Trends and Strategies in Telecommunication Industry 17 Conclusion and Recommendations 19 Reference 22 Executive summary Telecommunication system is an inevitable part of the modern society. Technological development of telecommunication systems and its high demand has contributed to the growth of this industry. The telecommunication industry of USA encompasses different sectors like wireless, wireline, broadband and satellite services. This industry is mainly influenced by two factors i.e. the technological developments and increasing competition. In order to analyse these two factors of telecommunication industry, Porter’s five forces and PEST analysis are important tools. Porter’s five forces analyses various forces that drive the competition of this industry. The suppliers’ bargaining power and threat of substitute products and services are very low in this industry. A large numbers of telecom equipment manufacturers are available in the global market. The US telecom companies outsource various IT related services to different countries. Due to many existing companies, the rivalry in this industry is very high, and the customers have high bargaining power as they are often spoilt with options. The PEST analysis attempts to scan the macro environmental factors of US economy that influence the industry structure. Political and legal framework of the telecommunication industry in US has made it more liberalized. The telecommunication deregulation act of 1996 has opened the market to all types of players. Many international players have also entered the market which has further intensified the competition level. Technological development in US is another factor that has enhanced the growth of the industry. Strong economic condition of USA encourages telecommunication operators to develop innovative products and services. The telecommunication industry of USA was badly affected by the financial crisis of 2008. This industry is at its recovering stage and the global technological innovation in telecommunication system indicates greater opportunity in coming years. The AT&T is one of the oldest and popular telecommunication service providers in USA. It is a successful telecom service provider in terms of sales revenue. In order to provide better customer satisfaction, the company aims to bring constant innovation in its services and products by investing in research and development. The telecommunication companies of USA keep modifying their business policies and strategies with time. Their strategic moves create a specific market trends in telecommunication industry. Companies focus primarily on the improvement of services and product quality through development of relevant value chain. They also focus on their pricing strategies to attract customers. Mergers and acquisitions are the most notable market trends in US telecommunication industry. In order to increase the market share, telecommunication service providers must understand the industry structure and improve its customers’ satisfaction level and technological advancements. Introduction Development of communication is inextricably linked with the growth of modern society. Communication has facilitated the progress of economy, expansion of trade & business, transfer of education, strengthening of defence etc. Prior to the invention of scientific gadgets, people used to apply smoke signals for long distance communications. However, with time, the world experienced a rapid growth in the field of science and gradually scientists came up with advanced technologies for long distance communication like radio, telephone, television and internet etc. At present, the modern society has become so depended on telecommunication, that a world without it cannot even be imagined. It has been instrumental force behind globalisation of trade and business. The bye-products of globalisation such as multinational companies, out sourcing facilities are all indebted to the technological advancement of telecommunication. It helps in saving valuable time, money and effort of people thereby increasing the productivity. Telecommunication industry deals with providing services for transmitting communications through electronic systems like mobile, telephone, internet etc. Two major components were instrumental in the development and growth of telecommunication industry. The first factor is the advancement of modern technology that has changed the face of global telecommunication system. Rising competition and profitability in telecommunication industry is another major factor for development. Growing demand and profitability has attracted many multinational companies and continues to be a lucrative option for the new entrants. Global telecommunication industry is basically controlled by many national and multinational companies. This industry has become digitalized and is equipped with the latest technicalities of communication. This industry includes different types of service providers like “telephone companies, cable system operators, internet service providers, wireless carriers, and satellite operators” (The National Academic Press, 2010). They offer services through software based application. This essay attempts to throw light on the global telecommunications industry of USA. The primary objective of this paper is to analyse the telecommunications industry using relevant analytical tools by figuring the industry structure. In the very beginning of the project, the level of competition present in telecommunications industry will be analysed using Porter’s Five Forces model. Consequently, the underlying threats and opportunities in telecommunication industry will be pointed out and then followed by PEST analysis to provide a better insight of the industry. This will be followed by an analysis of the current market position; in this context the strategies of the leading telecommunications companies of USA will be helpful in understanding the market scenario. Finally, some plausible recommendations will be suggested, based on the analysis of the indentified findings, in the concluding sections. Analysis of Telecommunications Industry Using Porter’s Five Forces Analysis of an industry is conducted to find out the level of level of competition and the factors that intensifies it. In this context, Porter’s Five Forces seems to be the most appropriate model for analysing the competitiveness of the industry. Competition level of an industry determines the level of profitability that its players will enjoy. Generally an industry with lower competition enjoys higher profitability and tends to attract the new entrants. Porter’s model of industry analysis focuses on five forces and these are: (1) the bargaining power of suppliers, (2) the bargaining power of customers (3) the rivalry between the existing companies, (4) the threat of substitute product and (5) the threat of new entrances. Michael E. Porter was the first who identified these five forces of competition and the following figure represents the five forces. Figure 1: Porter’s Five Forces of Industry (Source: Harvard Business School Press, 2006, p.38) According to the above figure, the five forces that affect the telecommunication industry of USA have been discussed below. The bargaining power of suppliers: The telecommunication companies require various types of telecom equipments like mobiles, software, fibre-optic cables, advanced broadband equipments for the process of transmitting information. Therefore, it can be said that this industry is extremely depended the suppliers for the purchase of this equipments. Initially, in USA, telecom equipments makers were very few in number and they enjoyed a monopolistic market structure. However, with the advent of many national and multinational companies, the bargaining power of suppliers has reduced considerably. At present, many telecom equipments makers like Tellabs, Lucent, Cisco, Nokia, Nortel, Ericsson, Alcatel etc are available and they have diluted the bargaining power of suppliers. Consequently, the telecommunication companies are experiencing a very low switching cost. To add to it, the IT companies, which are crucial suppliers of software for telecommunication purposes, are outsourcing IT related services to different courtiers like India, Japan, and Australia etc. The bargaining power of customers: With increase in telecommunication companies as well as suppliers of telecom equipments and services, the bargaining power of customers has increased significantly in recent years. Various brands, providing the same services are available in plenty for the consumers. The customers of USA are conscious of the market and they seek better service provider at a lower cost. The switching cost of customers from one services provider to another is also relatively low. The above facts indicate that the customers’ bargaining power in this industry is very high. In order to capture large number of customers, many companies like AOL, Cox Cable Company, Warner, Comcast offer a total packaged services that includes handsets, internet services etc. Nonetheless, new providers of broadband service and telecom services are entering the market, prompting a further increase in the bargaining power of suppliers (Bagrak et al, n.d.). The rivalry between the existing companies: The telecommunication industry of USA can be divided into three types, according to the nature of services i.e. wireline, wireless and broadband. During 1990s, the USA government deregulated the telecommunication industry and the market was made open for many private and multinational companies. In 1996, the Federal Law withdrew all types of regulations, following which other states also passed laws for telecommunication deregulations (Consumer Union, 1998). The multinational and private companies have introduced latest technologies to facilitate better communication in order to capture larger market share. At present, there are more than 30 companies present in telecommunication industry of USA. This has aggravated the process of mergers and acquisition in this industry. For example, cable operators like Cox Communications Inc., Comcast Corp. and Warner has entered into an agreement for selling cellular services by using Sprint Nextel Corporation’s wireless networks. This has lead to the strengthening of the market position of companies that were involved. Increasing number of competitors and their rivalry has reduced the profitability of the industry. Besides, the exit barrier of the telecommunication industry is also very high as the companies use specialized equipments. The threat of substitute product: Services provided by telecommunication is very unique and with no strong substitute. However, the satellite services poses as a strong alternative. Satellites can be used as high speed network for business purposes. Instead of preferring high speed internet services, people can prefer listening to music, watching television, reading news papers etc. it can be taken as potential substitute of telecommunication services. Many people also can satisfy themselves by the using the WI-FI internet available in work place or institutions. The increasing tech savvy generation and the awareness regarding it have reduced threat of substitute in this industry. The numbers of internet and mobile users are increasing significantly. The threat of new entrances: The telecommunication industry has high entry barriers as it requires huge investments. The entry barrier is determined by the financial opportunities available in USA. Despite, high level of competition and increased bargaining power of suppliers & customers, this industry still attracts new entrants. In the broadband sector, Google and Yahoo are trying to capture the market by providing high speed WI-FI network. Besides, many foreign companies are trying to enter the wireless sector by merging with the existing telecommunication companies. Many potential entrants believe that a large portion of US telecommunication market has still remained unexplored and it can be turned to be a very profitable market for them. PEST analysis of telecommunications industry in USA In order to understand the macro environment factors that influence the telecommunication industry of USA, PEST analysis technique is implemented. It is very helpful in scanning the external environment, constituting political, economic, social and technological aspects. All these factors are very important in shaping the structure of telecommunication industry. The political factors deal with various policies and legislation of governments. The economic factors include economic condition of a country. Social factors indicate the nature and feature of the demography of a country and technological factors deal with technological development of a country. Figure 2 portrays these four factors. Figure 2: PEST Analysis (Source: Roberts, 2001, p.220) Political factors: The political factors of USA play very crucial role in the development of telecommunication industry. Traditionally, this industry was regulated by the US government. In 1996, in order to regulate the telecommunication industry, the US government founded The Federal Communications Commission (FCC) which was responsible for regulating the “interstate and international communications by radio, television, wire, satellite and cable” (Federal Communications Commission, 2010). In 1996, FCC ceased the monopoly of AT&T by imposing Federal Telecommunications Act. This act enabled the local telecommunication companies to enter the market. Such measures led to the rapid growth of US telecommunication industry (Florida Public Service Commission, 2007, p.6). However, this act was not applicable for the non-wire line companies. Currently, the US government has liberalized this industry by encouraging the level of competition. DR-CAFTA (The central America-Dominican Republic Free Trade Agreement) has also facilitated the telecommunication sector of USA by enhancing the infrastructure. This agreement has made the market open for DR-CAFTA countries (TIA-a, n.d.). Economic factor: The economic condition of an economy is very crucial for the development of an industry. United States is one of the most powerful economies in world. Favourable economic policies have positively impacted the telecommunication industry. Increasing disposable income and GDP of people has led to the increase in demand for telecommunication equipments and services. In 2009, the GDP of USA as per purchasing power parity was US$14.14 trillion which is the second highest in world (CIA, 2010). The US economy was badly affected by the global meltdown of 2008. The telecommunication sector had not been an exception to it. However, this industry is recovering faster as compared to other industries of USA. Social factors: The social condition of USA is strong which has positive effects on the growth of industry and services sectors. 99% of the total population is educated and this high literacy rate is a boon to the telecommunication sector. The youth constitute the major customer group of telecommunication industry. The following table displays the population by age groups. Table 1: Population by Age (Source: National Atlas of the United States, 2009) According to the above table, the population of young people is the highest in USA. This high rate of young population has increased the use of internet, broadband and wireless mobile services. As per the 2008 data, 150 million US people use telephones, 270 million US people have mobile cellular and 231 million people use internet (CIA, 2010). Technological factors: In order to bring about development in the field of telecommunication, American National Standards Institute (ANSI) founded the Telecommunications Industry Association that is responsible for the technological development of this industry. This organisation looks after the maintenance of ten technological areas like mobile communications systems, user premises equipment, mobile private radio, satellites, steel antenna towers etc (TIA-b, 2010). The US government is encouraging technological advancement by investing in research and developing enhanced telecommunication. Opportunities and Challenges in Telecommunication Industry The world economy is passing through its recovery stage after the global downturn of 2008. In 2008, the telecommunication industry experienced negative growth. However, at this stage, it is expected that telecommunication industry will be a vital driver in recovering the weak economy of USA. There are two main factors that indicate the growth of telecommunication industry of USA. Firstly, the recuperating global economy has led to favourable macro environmental factors. Secondly, substantial technological advancement in telecommunication industry of USA indicates that telecom operators will experience highly remunerative market in coming years. The prime thrust for telecommunication industry is expected to come from internal industrial developments like product, service & network upgradation and inventions by telecommunication operators. In recent years, this industry has witnessed enormous technological developments even during the recession period. Due to such technological improvements, the demand for telecommunication is constantly increasing at a higher rate. In USA market, the 3G and 4G LTE (Long-Term Evolution) mobile network service has already been launched in USA and now, the 4G WiMAX (Worldwide Interoperability for Microwave Access) is getting popular. These technological developments and increasing demand has created many opportunities for the telecommunication companies as well as the investors. Firstly, the demand of telecom in rural and urban areas, and the infrastructure of developing and developed market are growing continuously. Besides, the economic policy for telecommunication industry is encouraging the operators and telecom equipment manufacturers. Secondly, high demand for smart-phones is helping the operators to deliver a wide range of telecom services. Thirdly, international diversification has caused various types of development in the existing market (Zacks Equity Research, 2010). However, this industry faces several challenges due to underlying threats. The slowdown of the potential business has reduced the overall value of telecommunication industry. Instead of focusing on business developments, many companies concentrate on balance sheet improvements. The telecom companies are exposed to liquidity risks as their credit profiles are weak as compared to the industry norms. Increased competition in wireless, wireline and broadband services poses threats to the potential business of small and medium companies. Since the last 20 years, telecommunication industry has undergone significant expansion. However, the biggest challenge for the industry is global meltdown and recession. At present, this industry is facing the implications of post-effect of financial crisis (Marthajensen, 2010). Telecommunication Companies of USA The USA telecommunication market is populated with many international and national telecom companies. The USA telecommunication industry takes into its fold various telecom related business sectors like wireless communication, broadband, satellites, fiber-optics, long & local distance telephone services, and cable TV systems. The companies like ADTRAN Inc., JDS Uniphase Corp. AT&T, TELUS Corp., and Qualcomm Inc. American Tower Corp. etc are the major players in this industry. Competition in each business sector is rising at an amazing speed. For example, in broad band sector, the lower prices of services have accelerated the market. The US residential share through broadband is increasing at 11% per annum. The following table portrays the growth of residential broadband household. Table 2 (Source: Bagrak et al, n.d.) The companies are competing with each other in every aspect of business, starting from upgraded services and network, pricing strategy, technological inventions. In USA, the telecom service industry AT&T is one of the leading telecom service providers. It offers “iPhone 4 to next-generation TV services and sophisticated solutions for multi-national businesses” (AT&T-a, 2010). The company has expanded globally and has the widest international coverage area. Prior to the Federal Telecommunications Act of 1996, the company was enjoying monopoly market structure. After deregulation, the company had to face the severe competition from the national and multination telecom service providers. During the late 1990s, the company had to restructure its strategic move to counter the competition. However, currently, the market position of AT&T is higher than that of its close competitors. The following table represents the market position of AT&T in the industry in comparison to its close competitors. Table 3 T-AT&T; S- Sprint Nextel Corp.; VZ- Verizon Communications Inc. (Source: Yahoo Finance, 2010) From the above table it is quite evident that the market position of AT&T is quite stronger than its close competitors Sprint Nextel Corp and Verizon Communications Inc. The company has been able to capture higher market capitalization. In 2009, the company experienced negative growth in its revenue. In the global telecommunication industry, AT&T ranks in the top ten in terms of sales. The following table portrays the ranks of the companies. Table 4: Telecom Service Providers Ranked by Sales (Source: Yahoo Finance, 2010) AT&T has developed its R&D department for bringing innovation in their services. The company owns the world’s largest intellectual property rights with more than 9000 patents. The management of the company focuses on continuous innovation for offering better services to its customers and clients (AT&T-b, 2010). Market Trends and Strategies in Telecommunication Industry The telecommunication industry of USA drives nearly $1 trillion sales revenue per annum. The global telecommunication industry experiences around $3.5 trillion of sales. During mid of 2007, there was around 2.3 billion cellular service subscribers and by 2011, the number of cellular users is expected to increase to 4 billion (Normile, 2008). In order to retain the existing customers and to capture the new potential ones, the telecom companies are attempting to provide high speed and vast coverage of network. In this industry, high level of customer satisfaction is instrumental in increasing the market share. Most of companies have developed their telecommunication value chain. The following figure presents an ideal value chain for telecommunication industry. Figure 3: Value Chain for Telecommunication (Source: Normile, 2008) For creating value for customers, telecommunication companies identify customer needs and then design service and product quality. Besides, companies also use innovative strategies in their pricing and promoting their products. The competitive scenario of telecommunication industry has been changing dramatically due to mergers and acquisition. In 1990, the USA telecommunication industry experienced massive wave of mergers that reconfigured the global market structure. After the implementation of telecommunication act of 1996, the rate of mergers and acquisition has increased significantly. The government deregulations have affected the business strategy of the telecommunication companies. Merger and developments in this industry has brought several changes and improvements in technological innovations and services quality. Merger and acquisition in telecommunication industry has led to the development of R&D. Merger between two companies encourages investments in R&D purposes and both the merged companies enjoy technological advancements that ultimately improve the quality of their services. “Acquisition of more and better network assets and technical abilities has been a stated primary factor driving mergers and acquisitions by the larger and more stable carriers seeking to expand their networks” (Majumdar, Moussawi and Yaylacicegi, 2009). These acquisitions help the companies to integrate the infrastructure of network. However, these acquisitions also have led to agency problems in USA telecommunication companies and have negatively affected the share holders’ value. Conclusion and Recommendations Telecommunication system has become an indispensible part of contemporary modern life. The USA telecommunication industry is populated with national and multinational telecommunication service providers. After the telecommunication deregulation act of 1996 was implemented, the market was made liberalized and the level of competition increased. The primary objective of this paper is to analyse the global telecommunication industry of USA. This paper deals with three broad sections. The first section has analysed various driving forces of competition in telecommunication industry and the macro-environmental factors of US economy influencing the overall industry structure and growth. The second section has discussed various opportunities and challenges that USA telecommunication industry might face. This section has focused on future prospect of the industry. The last section has dealt with market position of major US telecommunication service providers and market trends followed by these major players. In order to provide better discussion, AT&T, the major US telecom services provider has been selected for analysing its market position as compared to its close competitors. This section has also analysed the effects of mergers and acquisitions in telecommunication industry. On the basis of the above discussion and analysis of US telecommunication industry, some recommendations have been provided for better management of telecommunication business in US market. Some relevant recommendations have been given below. The telecommunication operators must focus and maximise customer value. The companies must develop proper strategy to cope up with regulatory framework imposed by the government telecommunication authorities. The telecommunication industry mainly depends on availability of proper infrastructures and hence the companies must make efficient investments for the development of infrastructure. The companies must bring technological advancements by ensuring innovation through research and developments. The company should ensure low operating cost by implementing various cost cutting measures. 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